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1. Introduction.................................................................................................................2
1.1 Modern Accounting Systems...................................................................................2
2. Criticism on Standard Costing....................................................................................3
2.1 Cost Drivers.............................................................................................................3
2.2 Performance Evaluation...........................................................................................4
2.3 Direct and Indirect Costs..........................................................................................4
2.4 Cost Objectives........................................................................................................4
3. Answering the Critics..................................................................................................5
3.1 Volume related Costs...............................................................................................5
3.2 Need for Real-time Quantitative Feedback..............................................................5
3.3 Too much Focus on Cost Control.............................................................................6
3. 4 Evaluation of Performance......................................................................................6
3.5 Continuous Improvement.........................................................................................6
3.6 Single Cost Driver....................................................................................................6
3.7 Standard Costing causing Dysfunctional Behavior..................................................7
3.8 Time and Money.......................................................................................................7
4. Validity of Johnson and Kaplan Statement.................................................................7
5. Conclusion..................................................................................................................8
6. References................................................................................................................10
1.
Introduction
Standard costing has often been considered as an essential tool in product costing,
planning and controlling, and performance evaluation (Zoysa and Siriyama 2007;
Sulaiman, Nik Nazli and Norhayati 2005). Standard costing involves estimation of output
cost which compared with the cost incurred in reality to find variances which are useful
in putting managerial control into practice (Rao and Bargerstock 2011).
Standard costing was designed to fulfill the requirements of mass manufacturing
industries, represented by high machinery and plant costs and producing large volumes
of repetitive outputs. Badem, Ergin and Drury (2013: 80) defined the aim of standard
costing as to provide the cost information relating to controlling costs, providing
convenience and quickness to compute product costs, preparing business budgets,
pricing products and measuring the performance of division managers.
Following are considered to be the four elements of standard costing system;
1. Setting standards for each operation
2. Comparing actual with standard performance
3. Analyzing and reporting variances arising from difference between actual and
standard performance
4. Investigating significant variances and taking appropriate competitive actions
(Edwards-Nutton and Technical Information Service 2008: 4).
2.
advanced production environment that results in declining direct labor and material
costs, reduced inventories and just-in-time production methods.
After mid 1980s the criticism on standard costing increased. Johnson and Kaplan
(1991), Ferrara (1995) and Monden and Lee (1993) assert that there is a decrease in
importance of standard costing for performance evaluation and cost control because of
aggressive competitive environment. Strategic signals are inefficiently detected by this
method (Fleishman and Tyson 1998). Shank and Govindarajan (1992) censured the use
of standard costing in competitive environment as it pays little attention on external
environment.
Now the report will shed light on the shortcomings of different attributes of standard
costing and variance analysis in modern manufacturing environment.
encompasses direct material, machine or labor cost which are based on product
volume, and therefore the cost driver fails to incorporate indirect cost (Patxi, Jordi, and
Llus 2013). The modern manufacturing environment believes in low volume high
variety, resulting high more changeovers and use of automatic or robotic machines,
resulting in high indirect fixed cost. The standard costing system should consider cost
drivers in terms of batches which will incorporate frequent changeover cost and it
should also increase the number of cost drivers to represent indirect cost also to enable
more accurate product cost estimation.
3.
3. 4 Evaluation of Performance
Evaluating performance through standard costing provides numerous benefits;
Standard cost variances provide feedback information designed to help managers
control operations in accord with the plans they have set. They highlight the difference
between the planned costs of a period and the actual costs incurred over that time. Cost
variances comprise several different elements that together male up the total reported
variance: 1. Costing system errors, 2. inappropriate standards, 3. Uncontrollable
random factors, and 4. controllable variances with operational causes (Mitchell 2005:
33).
4.
Countries
Percentage Utilization of
Japan
Sweden
England
Ireland
USA
Standard Costing
64
73
76
84
86
Sulaiman, Nik Nazli and Norhayati (2005) concluded that 70% of the local companies in
Malaysia and 76% Japanese companies in Malaysia use standard costing for cost
control and performance evaluation, and costing inventories respectively. Badem, Ergin
and Drury (2013) provided an evidence of usage of standard costing technique in 100%
automotive manufacturing (primary) companies and 71% supplier (secondary)
companies, where primary companies used it for cost control and performance
evaluation, costing inventories, computing product cost for decision making and as an
aid to budgeting, whereas secondary companies use it for cost control and performance
evaluation.
This high adoption rate reflects that the companies have learnt to modify standard
costing system to fulfill their needs of current manufacturing environment. The extent to
which the literature has been covered in this report suggests that the statement of
Johnson and Kaplan (1991) is not completely valid. However it does hold true in a
sense that the original standard costing system without any modifications was not
applicable in modern manufacturing environment.
5.
Conclusion
The report was commissioned to analyze the extent to which the statement of Johnson
and Kaplan (1991) holds true after twenty five years. The report starts with describing
the standard costing system and its objectives. The report then discusses the criticisms
on standard costing system employed in modern manufacturing environment, after
which criticisms were countered with help of articles present on the topic. In the end it
was concluded that statement regarding standard costing was too harsh and it doesnt
hold completely true.
6.
References
Badem, A., Ergin, E., and Drury, C. (2013) 'Is Standard Costing Still used? Evidence
Practices
In
UK
Manufacturing
Companies.
London:
Certified
Management, 33-34,37
Monden, Y., and Lee, J. (1993) How a Japanese auto maker Reduces Costs.
Management Accounting 75 (2), 22-26
106
Rao, M. H. S. and Bargerstock, A. (2011) 'Exploring the Role of Standard Costing in
Lean Manufacturing Enterprises: A Structuration Theory Approach'. Management
109-124
Zoysa, A. D. and Siriyama, K. H. (2007) 'Standard Costing in Japanese Firms;
Reexamination of its Significance in the New Manufacturing Environment'. Industrial
Management & Data Systems 107 (2), 271-283